News Release

Perspectives on the Fed

December 20, 2000

ELLEN FRANK
Professor of economics at Emmanuel College in Boston, Frank said today: “The rapid upsurge in business and consumer spending of the past few years has been heavily debt-financed. Consumer debt doubled over the last decade. Corporate indebtedness stands today at over $10 billion, while our $400 billion trade deficit requires unprecedented levels of international borrowing. In this context, even a slight downturn could set off mounting bankruptcies and snowball rapidly.”More Information

MARK WEISBROT
Co-director of the Center for Economic and Policy Research, Weisbrot said today: “The Federal Reserve’s decision to move from a bias towards raising interest rates to a bias towards lowering rates was widely interpreted as an indication that the Fed would likely lower rates next year. Third quarter GDP growth dropped to 2.4 percent, from 5 percent in the previous quarter. Auto sales, housing starts and retail sales are also lagging. The person who really ought to take the lion’s share of the blame for a ‘hard landing’ is Fed Chair Alan Greenspan. Fearing ‘tight labor markets’ — something that most people celebrate because it means more job opportunities and a chance at a pay increase — the Fed has raised interest rates six times in the last 18 months. These rate increases, which brought the short-term federal funds rate to its highest level in nine years, have started to have their intended effect: slowing consumer and business spending. In the coming months this will probably be seen as a mistake, and one that will not be so easy to correct. The Fed, which elevates the fight against inflation above all other concerns, actually brought on the last recession (1990-1991) by raising interest rates to 10 percent in 1989. Although Mr. Greenspan began lowering them as the economy slowed, it turned out to be too little and too late. As before, working families at the bottom of the labor market will suffer the most from the Fed’s prioritizing low inflation over low unemployment.”More Information

JANE D’ARISTA
Director of programs at the Financial Markets Center, D’Arista said today: “Evidence that the Fed’s rate increases are slowing the economy abound. But the full impact of those rate increases is yet to be felt. Having confined itself to a single policy instrument — changes in short-term interest rates — the Fed allowed huge inflows of foreign investment to drive the rate of private sector borrowing to levels significantly above the rate of growth of the economy, setting the stage for the asset price bubbles in the stock and commercial real estate markets and driving up the price of residential housing as well. Higher rates have slowed the credit expansion but they also make it harder for the business and household sectors to pay back debt. And, as the cost of debt service rises, spending is falling, taking profits in their wake. Household sector debt is now 103 percent of disposable income, up from 89 percent at the beginning of the last recession. The Fed should cut interest rates, but it must also use regulatory controls to prevent another round of credit expansion. Otherwise, rate cuts will encourage shifts out of the dollar that will only end up raising interest rates as borrowers scramble for a shrinking supply of funding to roll over existing short-term debt.”More Information

For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020